So I came across this article about LQDA which I thought was excellent and would like to hear your thoughts on it. the link is here https://galahadcapital.substack.com/p/lqda-litigation-overhang-creates

Below is only the first part of the article

Liquidia Corp (LQDA)

Price: $5.90

Shares Outstanding: 64M

Market Cap: $320M

Cash: $70M (Only used 70% of cash balance – not profitable)

LT Debt: $24M

EV: $274M

The complicated nature of this special situation resulted in this analysis being longer than my normal posts. Therefore I wanted to include a quick summary of the analysis. While this situation is inherently complicated, the thesis itself is fairly straight forward. Liquidia is currently in a Hatch-Waxman litigation after their competitor, United Therapeutics, filed a lawsuit against them in 2020, claiming that Liquidia was infringing on three of their patents. In 2021, Liquidia received tentative FDA approval for their product Yutrepia, pending the outcome of the patent dispute. Roughly two years later, we are now close to the dispute being resolved, with the decision expected to be handed down between August and the end of October. While it’s difficult to probability weigh the outcome, I do believe Liquidia will receive a favorable court ruling and will therefore be able to launch Yutrepia in 4Q2022.

Both Liquidia and United are focused on pulmonary arterial hypertension (PAH). United pretty much has a monopoly on PAH (group 1) patients & PH-ILD (group 3) patients, and Liquidia is now looking to enter this market with their new product Yutrepia. United’s product, Tyvaso, did 607M in revenue in 2021, and looks to do roughly 800M this year.

That’s revenue from group 1 and group 3 combined. The TAM for group 1 and 3 combined, is roughly 5.3B – a massive market. Liquidia also has the superior product, and so they could possibly take significant market share from United. Given Liquidia’s 320M market cap, and them possibly entering a 5.3B market with the superior product, a favorable decision by the district court could result in a significant rerating of the company. Overall, I believe this situation offers a very attractive risk/reward profile at the current price.

Brief Business Overview

Liquidia Corp is a biopharmaceutical company focused on pulmonary arterial hypertension (PAH). PAH is a rare, chronic, progressive disease caused by hardening and narrowing of the pulmonary arteries that can lead to right heart failure and eventually death, with an estimated prevalence in the United States of approximately 30,000 patients. The company’s proprietary PRINT engineering technology allows them to engineer and manufacture highly uniform drug particles with precise control over the size, three-dimensional geometric shape and chemical composition of the particles. As a result, the company has been able to develop their main drug candidate Yutrepia (treprostinil) inhalation powder, which is an inhaled dry powder formulation of treprostinil delivered through a proven, convenient, palm-sized device.

The company also has a commercially approved product named Treprostinil Injection. The Liquidia PAH subsidiary (formerly RareGen) commercializes generic Treprostinil Injection in a partnership with Sandoz. Treprostinil Injection is most likely nothing more than a $15-25M revenue product at 80% gross margin. In other words, it might provide some flexibility in terms of near term capital needs, but nothing more.

The PAH market currently has one dominant player, Liquidia’s only competitor – United Therapeutics (UTHR). UTHR sells Tyvaso, a nebulized form of treprostinil along with a few other versions of the same drug which are administered via infusion. Tyvaso did 607M in revenue in 2021 and looks to be doing 800M in 2022. That’s for group 1 and group 3 patients combined. As mentioned above, Liquidia’s drug, Yutrepia, is an inhaled version of treprostinil targeting Tyvaso’s current market. An inhaled version of treprostinil is better than a nebulized version – nebulized treprostinil requires a clunky device with 10-13 parts while inhaled treprostinil only requires an inhaler. That’s why UTHR is coming out with their own inhaled product, Tyvaso DPI, through a partnership with MannKind Corporation.

Timeline And Development of The Lawsuit

On June 5th, 2020, Liquidia’s only competitor – United Therapeutics Corporation – filed a lawsuit against Liquidia for infringement of U.S. Patent Nos. 9,604,901 (the ‘901 patent) and 9,593,066 (the ‘066 patent) relating to United Therapeutics’ product Tyvaso (treprostinil) Inhalation Solution. The lawsuit came as a result of Liquidia filing their NDA for the approval of LIQ861 – now known as Yutrepia. Upon initiation of the lawsuit, the FDA triggered a statutory regulatory stay on the final approval of Yutrepia until October 27, 2022, or earlier resolution or settlement of the ongoing litigation.

On July 24th, 2020, UTHR filed an amended complaint asserting infringement of U.S. Patent No. 10,716,793 (‘793) in addition to the already asserted infringement of U.S. Patent Nos. ’901 and ’066. However, the ‘793 patent was not subject to the FDA’s regulatory stay because it was not listed in the Orange Book for Tyvaso when Liquidia submitted the NDA for Yutrepia.

In October, 2020, LQDA provided an update on the U.S. Patent Trial and Appeal Board Decision on Inter Partes Review (IPR) of two of United’s Tyvaso patents. The update explained how PTAB had instituted IPR on patent ‘901, but denied institution on patent ‘066. This update meant that the 30 month stay would still be in effect, and that LQDA would have to argue invalidity and non-infringement in the district court regarding patent ‘066.

I wanted to briefly explain the difference between the district court, where the trial was held, and the PTAB, as they do two different things. The PTAB IPR is filed by LQDA to review patentability of claims in the patent, while cases filed by UTHR go to the district court to argue LQDA infringes (though LQDA can either argue invalidity or non-infringement as defense). For the PTAB to review a patent, one or more claims have to be unpatentable.

Fast forward to August 2021, the PTAB instituted an IPR proceeding against the ‘793 patent. A couple of months later, in October 2021, the PTAB ruled in Liquidia’s favor in the IPR proceeding against the ‘901 patent. In its ruling, the PTAB found that seven of the nine claims were unpatentable. Only the narrower dependent claims 6 and 7 remain, both of which require actual storage at ambient temperature of treprostinil sodium.

On November 5, 2021, the FDA issued a tentative approval for Yutrepia (treprostinil) inhalation powder, which is indicated for the treatment of pulmonary arterial hypertension (PAH) to improve exercise ability in adult patients with New York Heart Association (NYHA) Functional Class II-III symptoms. What this means is that if the PTAB and/or the district court rules in Liquidia’s favor, the approval will no longer be tentative, and they can launch Yutrepia right away.

December 2021: The Court grants LQDA leave to file a motion for summary judgment of invalidity of the ‘066 and ‘901 patents due to collateral estoppel. Trial in the Hatch-Waxman litigation is scheduled for March 28-30, 2022. Later that month, on December 29th, UTHR filed a stipulation of partial judgment with respect to the ‘901 patent. Under the stipulation of partial judgment, UTHR agreed to the entry of judgment of Liquidia’s non-infringement of the ’901 patent based on the Court’s construction of certain terms in the patent. With this stipulation of partial judgment, only the ‘066 patent would serve as a basis for the on-going regulatory stay for final approval of Yutrepia (treprostinil) inhalation powder by the FDA.

That brings us to July 22nd, 2022, the PTAB rules in Liquidia’s favor in IPR proceeding against patent ‘793. In its ruling, the PTAB found that, based on the preponderance of the evidence, all the claims of the ’793 patent have been shown to be unpatentable.

Conclusion

I think at this point, my conclusion is that while it’s hard to probability weigh the outcome of the trial, the risk/reward is favorable enough that it’s worth taking a position, for me. In the short term you get a risk reward profile of 75-80% downside with 200%+ upside. For what it’s worth, I do also think the odds of getting a favorable ruling is in Liquidia’s favor. It’s just difficult to determine how much in Liquidia’s favor the odds are. Furthermore, given that the outcome is favorable, not only do you get the possibility of 200% immediate upside, you also get a clear path to a much higher return than the 200%, over the long term. In fact, the IRR’s could get silly high.